The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural Experiment
Journal of Human Resources
University of Wisconsin Press
Reason for embargo
Under an indefinite embargo. No publisher permission for author manuscript deposit.
This paper studies the effect of increased product market competition on executive compensation and incentives. We use a reform that simplified firm entry regulation in Portugal as a quasi-natural experiment, and exploit its staggered implementation across municipalities for identification. Using employer-employee data, we find that increased competition following the reform raised total pay but reduced the sensitivity of pay to firm performance. This is consistent with theoretical results showing that a fall in entry costs weakens managerial incentive provision. Entry deregulation also increased performance induced CEO turnover and firms’ probability of exit, suggesting that competition provides direct incentives for managerial effort.
The research was partially funded by Fundação para a Ciência e a Tecnologia through the Applied Microeconomics Research Unit [NIMA], award no. PEst-OE/EGE/UI3181/2014.
This is the author accepted manuscript. The final version is available from the publisher via the DOI in this record.